Monday, July 25, 2011

How would you like to pay for that: Debit or credit?

You’re making a purchase at the store and hand the clerk your debit card. The clerk asks you, “Debit or credit?” What do you answer?

If you answer “debit”, it becomes an online transaction and you’ll need to enter your PIN number. The funds will be instantly withdrawn from your account.

If you answer “credit”, it is an offline transaction and you’ll need to sign the slip as you might if you had used a credit card. An offline transaction is similar to writing a check and it will take a little while for the funds to be withdrawn from your account. Because of this delay, you need to keep track of your debit transactions in your checkbook register to prevent an overdraft charge or a refusal of the purchase. Simply checking on your current balance from the ATM machine is not reliable.

Merchants prefer a PIN transaction because they are charged less for the transaction by the bank. Banks, however, prefer a signature transaction because they get a higher fee from the merchant.

Why use a debt card? For many people, it’s more convenient than carrying around cash and it’s easier and faster than writing a check. If you’re carrying a balance on your credit card account, by using debit instead, you save on the interest charges that would have been charged. Some people use a debit card because they don’t trust themselves with a credit card. Using a debit card, however, does not affect your credit report and will not help build or repair your credit score. This is because it is regarded the same as a cash transaction and is not reported to the credit bureaus.

Most debit card fees have disappeared. Some still charge a small annual fee or transaction fee, especially for an online or PIN purchase. To avoid unnecessary or unexpected fees, know the policies of your bank when you sign up for the debit card.

If you overdraw on your account using a debit card you can incur an overdraft fee. Typically, your bank will cover your transaction for a flat fee of about $20 to $30 each time you overdraw your account. Your bank may offer overdraft protection. Under one type of plan, your checking account will be tied with your savings account. When an overdraft occurs, an amount to cover the shortfall will be transferred from savings into checking. You will still be charged a fee, but a smaller fee. A different plan is a line of credit. Under this type of plan, the overdraft is covered with a loan, and you are charged a fee as well as interest on the loan.

The standard practice in the past has been to automatically enroll you in the bank’s standard overdraft practices for all types of transactions when you opened the account. Under new rules passed recently, the bank must first get your permission to apply its standard overdraft practices to ordinary debit card and ATM transactions before it can charge an overdraft fee. In other words, you must opt in or agree to allow the bank to charge you the fee. What happens if you don’t opt in? The transaction will be declined, but it saved you the fee.

As a protection against fraud, errors or other losses, some merchants put a hold on your account when you use your debit card with an offline or signature transaction. These holds often result in overdrafts for people who carry a low balance in their checking account. Filling your car’s tank at the gas station, for example, may create two separate transactions. The first charge is to get approval or authorization from your bank for an estimated amount of the purchase, and the second one is for the actual charge or settlement. The amount placed on hold in the first transaction is not available to you until it is cancelled by the merchant which may be as long as 72 hours. Hotels may put on a hold for the entire estimated amount of the transaction. The amount of the hold depends on the merchant and the time as to when it is released varies by the bank’s policy.

Paying with plastic can be a convenience but it still needs to be done with caution.

For additional information on avoiding overdrafts, see

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